Question

Give an example of a negative or positive externality that you know about or have experienced. Once you have identified the externality, describe what is causing it and who it is effecting. Once you have done this, discuss the public policy or the private solution that is being applied to the negative or positive externality and discuss if it's working and how the externality is being internalized.

Answer 1

Externality of an action is the cost or benefit of that economic activity experienced by an unrelated third party.

Example: My roommate is a chain smoker and the smoking results in negative effects on the health of not only my roommate but also mine. This is an example of negative Consumption externality.

Government can take step to internalize the externality by imposing tax on the buyers of cigarettes Or, by raising public awareness. This would discourage the smoking activity that causes negative externality.